China’s rental residential real estate sector has entered a new era of opportunity, according to one of the industry’s most active investors, after the COVID-19 pandemic helped to take some of the froth off of one of the country’s hottest sectors.
With headlines over the past year having shown the struggles of apartment rental managers that had counted on government policy support to help them grow from startups to real estate industry giants at internet speed, Warburg Pincus managing director Qiqi Zhang sees the recent downturn as having created expansion opportunities for more solidly built players.
“Developers, hotel managers, operators backed by VCs and PEs, all entered the market,” Zhang said. “People thought the entry barrier might be low, it’s just acquiring a building and doing some of the renovations. But I think they made a mistake, that before they really had a very strong operating system in place, they started to expand really, really aggressively.”
Zhang, who led the US private equity firm’s investments in multi-family residential projects such as Mofang, Ziroom and Nova Property investment, shared his thoughts on what’s next for China’s build-to-rent sector in a spotlight interview session today on MTD TV, where he appeared together with Jessica Yu Minjun, the chair of urban renewal specialist Shanghai Golden Union Group.
Carnival Ride Complete
Zhang and Yu shared their thoughts in a spotlight interview session that was part of Mingtiandi’s Asia Multi-Family Investment Forum 2021, which was sponsored by Yardi.
Investing in China’s multi-family market segment has been a “roller coaster” experience in the last several years, Zhang said, as government efforts to encourage the sector sparked a surge of activity that has seem some less carefully managed players fall by the wayside during the pandemic.
“It’s challenging now for the industry, but at the same time it creates a lot of opportunities, especially for these leading players,” he noted.
“Ziroom, which is one of our portfolio companies, is now the leading player in the decentralised space, and they are actually expanding really quickly this year,” Zhang said. “In the same way that, Mofang, a more centralised player holding buildings, has also done a lot of M&A over the last six months and are expanding very quickly.”
In 2018, Warburg Pincus had led a RMB 4 billion (then $621 million) round of funding in Ziroom, which matches apartment owners with tenants in return for management fees. In 2013, the company made its first investment in Mofang, a Shanghai-based rental apartment operator that owns its rental assets.
From having backed a range of rental apartment strategies, Zhang made it clear that asset-heavy strategies may be best suited to a market where rental residential is still in its early stages.
“If you own the underlying asset, you do have a lot of advantages,” he said. “One is you are more defensive to a downturn cycle. Second, on a per-square-metre basis, because you own the underlying asset, you will have the capital gain.”
While owning the property is the way forward, acquiring and repositioning existing assets may offer a means to provide stronger returns at lower capital costs, as Golden Union’s Yu illustrated from her experience acquiring and repositioning the Shankangli retail project in Shanghai’s Jing An district.
For that project, Golden Union bought a former steel factory and converted the premises into a hip retail and entertainment destination.
“At the time (that Golden Union acquired the asset), the area surrounding the property was still a construction site, and not as promising as it looks today,” she said. “But we have always been forward looking and we anticipated the future prospects of the property.”
Yu’s company has spent almost 20 years as a developer and operator of asset-heavy projects, including the Kempinski serviced apartments in Shanghai that the company acquired 12 years ago.
To better leverage the potential returns from managing value-add projects such as Shankangli, Yu’s commercial management unit, Golden Union Commercial, began trading on the A-share market last year. The company runs about 70 projects in China with a gross floor area of over 1 million square metres (10.8 million square feet), and the experience has helped Golden Union develop expertise in managing asset-heavy projects, Yu said.
Changing Face of Cities
The two executives pointed to rental housing as fulfilling a key policy need in China, by allowing young professionals a way to find quality housing in the country’s largest cities. Yu drew particular attention to a “talent war” that has erupted among cities in recent years.
“Provincial capitals like Wuhan, Xi’an and Hangzhou attract hundreds of thousands or even millions of young people every year,” she said. “These young talents are well-educated and suitable to the needs of a developing city.”
However, with the costs of home acquisition in China’s major cities now among the least affordable in the world, creating professionally managed rental housing makes these cities more appealing to young professionals.
Greater China Up Next
MTD TV’s Asia Multi-Family Forum focuses on Greater China for the next panel discussion on Wednesday 12 May. That show will feature Greystar’s managing director for China investment, Charles Ma, Weave Living founder and CEO Sachin Doshi, Eric Pang, head of capital markets for China at JLL and Keith Chan, CEO of China rental apartment operator Funlive.
Japan will be the focus of a panel discussion on Tuesday 18 May, with that session to feature Greystar’s senior managing director for Asia Pacific, Ed Boyd, Ken Sakuramoto, head of equity advisory for Japan at JLL, and Rushabh Desai, CEO for Asia Pacific at Allianz Real Estate.
On Tuesday 25 May, the Multi-Family Forum concludes with a panel on emerging rental residential classes in Asia Pacific.
In that session, Jyoti Ramchandani, a managing director at SC Capital overseeing the private equity firm’s Score+ strategy, will join Shusaku Watanabe, head of Japan real estate for , Nuveen, along with two other speakers, to explore opportunities in high-yielding market segments including student housing, co-living and senior living.